Wells Fargo engaged in a number of SILO (sale-out, lease-in) transactions--26 in all that figured into a substantial refund claim in 2002. In a Jan. 8 opinion, the Court of Federal Claims held that the transactions lacked economic substance, scuttling the company's claimed deductions. See Larson, Wells Fargo Loses $115 Million Tax-Deduction Lawsuit, Bloomberg.com (Jan 12, 2010). The court noted that prominent law and accounting firms Ernst & Young and King & Spalding had merely performed "window dressing ... to generate fees and lengthy documents to give the SILOs an appearance of validity." Id.
In the late nineties and early "aughts", SILOs were the "new" tax shelter, whereby a municipality or other tax-exempt entity transferred assets such as public transit buses or telecommunications equipment or metro-rail cars to a taxable party and then leased the assets back. The taxable party would claim ownership that allowed it a depreciation deduction on the assets, reducing its taxable income and hence resulting in significant tax savings. The municipality didn't suffer from the loss of the depreciation deductions, since it wasn't taxable in the first place. The municipality generally ended up with an upfront payment, essentially its fee for facilitating the tax shelter for the taxable corporation. That fee (and similar payments to other parties who facilitated the transaction by creating documents, etc.) was generally the only money that changed hands in SILO deals--all the rest were circular flows of funds, or mere accounting entires, under the purported sales documents and the purported lease documents.
In Wells Fargo's case, it claimed more than $115 million in depreciation, interest, and transaction cost deductions for 2002 connected with participation in 26 SILO deals. The parties dealt with five specific transactions at trial--four involving public transit agencies (in New Jersey, California, Houston, and Washington) and one involving cellular telecommunications equipment (Belgacom Mobile, S.A.). The court ruled that Wells Fargo did not have ownership of the property under the SILO transactions and that they lacked economic substance, since their only goal was to lower the company's tax liabilities.
This case comes after the American Jobs Creation Act of 2004 limited the use of SILOs (Section 848 of the Act) and their designation as an abusive tax shelter in Notice 2005-13. The IRS provided some transition relief from the 2004 crackdown in Notice 2007-4 (at page 260) (extending the transition relief of earlier notices 2006-2 and 2005-29 for one year). The IRS also offered a settlement deal to corporate taxpayers, letting them keep 20% of the tax savings from lease-back transactions. Two-thirds of the 45 companies targeted accepted that offer. See Schroeder, Federal Judge Rejects Wells Fargo's Bid to Get Deduction for SILO Deals, The Bond Buyer (Jan 12, 2010).
The work of King & Spalding here--that which the court calls mere "window dressing" for a tax shelter deal--is an example of the perverse result of overemphasis among the tax bar on the tax minimization norm. Attorneys spend time contriving to fit a transaction--one that does not originate in the business but in the desire to avoid taxes--into the "letter" of the tax law, even though they know that it is a transaction that is undertaken solely to generate tax benefits and is undertaken with lots of strings and whistles to confuse auditors or create the appearance of a genuine business transaction.
We academics bear some blame for the widespread attitude that there's nothing wrong with super-aggressive tax advice that permits taxpayers to undertake transactions that are not germane to their businesses solely for the tax benefits claimed to accrue. This pushes the tax minimization norm well beyond a reasonably prudent limit. We should suggest to our students that they and their clients might consider standing far enough back from the "tax minimization" tracks that they are sure they will not be ploughed under when the audit train comes through.